AER (annual equivalent rate)

AER, or annual equivalent rate, is what a savings rate genuinely pays over a year once compounding frequency is folded in. It strips away how often interest is added and shows the honest number for comparing one account against another.

Why it exists

Banks quote a nominal rate, but how often that interest compounds changes what you actually earn. A nominal rate compounded monthly pays more over a year than the same nominal rate compounded just once, because each month’s interest starts earning its own interest sooner. A nominal rate of 5% compounded monthly works out to an AER of about 5.12%. Without AER, two accounts advertising “5%” could pay noticeably different amounts, depending on whether interest compounds monthly, quarterly, or annually. AER normalises all of that into one figure, so a saver can line up accounts side by side and know the comparison is fair.

Not to be confused with

APR is the borrowing-cost mirror image of AER. Where AER tells a saver what an account truly pays, APR tells a borrower what a loan or credit card truly costs, again folding in compounding so different loans can be compared honestly.

Nominal rate is the headline figure a bank quotes before compounding is accounted for. It is the starting point for the calculation, not the answer. The nominal rate and the compounding frequency together produce the AER, so two accounts with the same nominal rate can still have different AERs if they compound at different intervals.